Affordability Pyramid Shows Most Americans Only Qualify for Lower-Priced Homes

The Census Bureau’s American Community Survey (ACS) provides detailed data on the income distribution of US households. The NAHB Priced Out Modeltranslates the income data into the distribution of homes that US households can afford and allows generating the Housing Affordability Pyramid. The pyramid shows how many households in the United States can afford homes in various price ranges. At the base of the market for housing is a large number of households with relatively modest incomes. The homes that these households can afford are also relatively modest. As the price of a home goes up, there are fewer and fewer households in each tier who are able to afford it.

Based on conventional assumptions and underwriting standards, it takes an income of about $26,430 to purchase a $100,000 home. In 2012, about 28.9 million households in the U.S. are estimated to have incomes lower than that threshold and, therefore, can only afford to buy homes priced under $100,000. These 28.9 million households form the bottom step of the pyramid. Of the remaining 87.5 million who can afford a home priced at $100,000, 23.3 million can only afford to pay a top price of somewhere between $100,000 and $175,000 (the second step on the pyramid).

This trend continues up the pyramid of house prices. Each step represents a maximum affordable price range for fewer and fewer households. The peak of the pyramid shows a very small share of households able to afford homes priced above $1.25 million. It’s possible to have more million dollar homes than this in the U.S., because many households would have initially purchased homes at lower prices which subsequently appreciated.

The pyramid is based on an income threshold and a 10 percent downpayment assumption. Households at the high end of the market may be more likely to have equity in a previously owned home or other accumulated wealth for a larger downpayment. However, it is less likely to be the case at the low end where affordability is a major concern. Increased development costs can easily price these households out of the market for a new home.

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One of the little dirty secrets of our industry is the Builder’s Certification of Plans, Specifications, and Site, (HUD-92541) form. We are forced to sign this form to allow our project to get FHA financing. My guess is that at least 30% of every city would not meet these standards of distance from airports, railroads and or heavy traveled road. What is a heavy travelled road. This form has to go if we are to build affordable homes in the city.